Determinants of International and Intercultural Human Resource Control: The Case of Taiwanese Subsidiaries int he People's Republic of China

This study develops a framework to categorize international and intercultural human . resource (IHR) control at" the subsidiary level across cultures. The effects of interorganizational interdependencies, competitive strategies, and cultural differences on the three different dimensions ofIHR control (input, behavior, and output) were studied using a sample of 100 Taiwanese subsidiaries operating in the People's Republic ofChina. The most notable relationships that were found include a robust association between a low cost competition strategy and the three dimensions of IHR control and the impact ofcultural differences on one type of control. Determinants of International and Intercultural HR Control 6061 I.doc page 3 Within the last decade, People's of Republic of China (PRC) has experienced unprecedented economic growth. During this time, it has had the highest average growth rate (above 10% per year) of any economy in the world. Due to its Open Door Policy, the PRC have imported very much capital, technology and management from foreign countries to help this economic explosion [Von Glinow & Teagarden, 1988; Gallagher, 1995]. According to Shin Hwa Newspaper Corporation [1995], it has become the most robust developing country in attracting foreign investment in 1995 (37,000 cases in 1995). Shin Hwa reports that these foreign direct investments (FDI) came primarily from Hong Kong (202 billion USD), Taiwan (33.9 billion USD) and America (24.9 billion USD) in 1994. In many of the FDI cases in the PRC, the industrial technologies have been transferred with relative success. Alternatively, human resource management (HRM) transfers seem to encounter much difficulty. In part, this is attributable to many cultural differences [Mc Laughlin, 1987; Von Glinow & Teagarden, 1988; Bucknall, 1994]. Therefore, it seems appropriate to study the effect of the international and intercultural HRM (IHRM) on FDI strategies in the PRe. Taiwan, a major FDI participant in the PRC, has a tense political relationship with PRe. At the same time, it also has a very important economic relationship with the PRC. Due to the same language and similar cultures, the PRC is becoming the most preferred partner for FDI. Further, many multinational corporations (MNCs), such as Philips Electronics, Kentucky Fried Chicken, and Alcatel Telecommunication, manage their PRC subsidiaries by importing managers from their Taiwan subsidiaries. Although the use of same language fosters the tight economic relationship between Taiwan and PRC, there are still some cultural differences between them because of ideological, historical, political, economic, and social welfare differences. An empirical study on the international and intercultural HRM (IHRM) ofTaiwanese companies operating in the PRC should shed some light on how HR philosophies, policies, and practices can be shared more easily. International and intercultural HRM in MNCs has been increasingly mentioned as playing an essential role in the control of operations in cross-culture context [Edstrom & Galbraith, 1977; Prahalad & Doz, 1981; Egelhoff, 1984; Jaeger, 1983, Pucik & Katz, 1986; Martinez & Ricks, 1989]. The most recent stream of research in this area has focused on how HRM strategy fits into the firm's overall business strategy. Although studies have suggested that strategic context influences integrated human resources practices, scholars know very little about how separate HRM practices fit into the overall strategic context. In addition, a variety of typologies have been DelcmUn3l1ts of Intematiccal 3I1d Intercultural HR Control 6061 I.doc page 4 devised to differentiate rHRM. They include: control systems [Egelhoff, 1984; Doz & Prahalad, 1984; Baliga & Jaeger, 1984; Pucik & Katz, 1986; Martinez, & Jaril1o, 1989]. Yet, a cybernetic model of control [Snel1, 1992] may provide a broad characterization of global HRM that could be useful to relate individual HRM practices to a specific type of control in the cross-cultural context. In the present study, we use a cybernetic system of control to characterize global HRM practices and place them in the overall business strategy context of firms. Numerous attempts have been made to identify the determinants of human resource management [Dyer, 1984; Tichy, Fombrun & Devanna, 1982; Bamberger & Phil1ips, 1992]. The two most frequently cited factors are the environment and business strategy [Dyer, 1984]. In the cross-cultural context, it has been argued that international HR strategy is influenced by different competitive strategies such as the product life cycle [Adler & Ghadar, 1989], organizational life cycle [Mil1iman, Von Glinow & Nathan, 1991], or Mile's & Snow's [1984] typology of Prospector. Defender and Analyzer strategies [Bird & Beechler, 1995]. However, as proposed by Bartlett & Ghoshal [1987] and Prahalad & Doz [1987], global competitive strategies need to garner the cost advantages of global integration of certain tasks vis-a-vis the differentiation benefits of responding to national differences in tastes, industry structures, distribution systems, and government regulations. In this study, therefore, we wil1 build an framework to investigate the relationship between these two strategic dimensions (low cost str~tegy and local differentiation) and HRM control in a cross-national context. Additionally, as MNCs can be conceptualized as interorganizational networks [Ghoshal and Bartlett, 1990], subsidiaries ofMNCs operate in the external network also. Typically, they have resource links to headquarters and other subunits as well as ties to firms and customers in host, home, and other countries. This interdependence with other organizations creates important implications for HR strategies [Wright & McMahan, 1992; Hannon, Huang & Jaw, 1995]. Baliga and Jaeger [1984] also proposed that the degree of interdependence between a HQ and its subsidiary was the most crucial factor influencing the extent of delegation and type of HRM control used by MNCs over their subsidiaries. Thus, we should also investigate the influences of interorganizational interdependence on individual dimensions of HRM control in a cross-cultural context. Furthermore, cultural differences have been considered to be an extremely important determinant of lHRM [Schneider, 1988; Laurent, 1986]. For instance, they have been offered as a contingency variable in the selection of control systems for subsidiaries [Baliga & Jager, 1984]. Alternatively, competitive strategy is also Determinants of International and Intercultural HR Control 6061 I .doc page 5 believed to have an influence on HRM [Schuler & Jackson, 1987]. Competitive Strategy has also been thought to have an interactional influence, along with organizational environment, on HRM [Bamberger & Phillips, 1992]. Furthermore, the institutional structure of the local environment in which a subsidiary is located has also been considered to play an important role in moderating the influence of economic and technical considerations [Ghoshal & Bartlett, 1990]. Hence, in the present study, we will investigate the moderating effects of these determinants on the IHRM control over subsidiaries. In summary, this paper develops a framework to categorize IHR control at the subsidiary level in crosscultural contexts and investigates several potential determil.1ants of IHR from a strategic perspective. First, we review several theories which were used to build the cybernetic system of HR control in cross-cultural context. Then, we applied them to a sample of Taiwanese subsidiaries in the PRe. The next section summarizes the research literature on international and intercultural HR control. Next, the determinants of IHR control are introduced and discussed. Then, we review the sample and methods used in this study. Our results follow this. Finally, we discuss the role of these findings for practitioners and researchers. INTERNATIONAL AND INTERCULTURAL HR CONTROL Control can be defined as any process that helps align the actions of individuals with the interests of their employing firm [Tannenbaum, 1968]. The effectiveness of an organization's control system is a function of the degree of alignment in the direction of control and the human resource management policies and practices that are in place to support it [Ouchi, 1979]. The overall control process has been characterized by Ouchi [1981] as 'people treatment' and consists of selection/screening, training, behavior monitoring and output monitoring. In this vein; two distinct modes of control, bureaucratic and cultural, have emerged from the literature on HR control [Baligea & Jaeger, 1984; Pucik & Katz, 1986]. More recently, while examining the supervisor/subordinate relationship, Snell[1992] identified and studied three types of control: (l)input control, (2) behavior control, and (3) output control. Here, we extend this reasoning and we propose that these three types of control affect the Parent/Subsidiary relationship in the context of International HR. Without a doubt, MNCs control their subsidiaries' (1) HR inputs (by influencing employee selection and training /socialization practices), (2) HR Determinants of International and Intercultural HR Control 6061 I.doc page 6 behaviors (through the level of bureaucratic and cultural control they do or do not impose), and (3) HR outputs (by the reward systems they permit or prescribe). Input Control Selection Selection is a basic control and monitoring mechanism, and it is basically a form of input control. Of course, it occurs prior to the monitoring of output [Jaeger, 1983]. Job applicants are screened and only those who are most likely to behave as desired within the organization are allowed into the system [Jaeger and Baliga, 1985]. As proposed by Ouchi (1979), selection is used for the internalization and identification of employees. This practice is most common in the "professional bureaucracies" such as hospitals, public accounting firms, and universities. Therefore, a control mode designed to identify and select the most appropriate people can generate high employee commitment as a result of internalized and shared values [Ouchi, 1979]. The selection process must identify people who: have the technical skills required (or are trainable), will accept the organization's authqrity, and can learn the organization's rules and regulations and perform in accordance with them. In the MNC context, when most host-country nationals move into the subsidiary's managerial positions, some major strategic management and control issues arise. They include, how to assure that local managers are committed to world-wide rather than just local objective [Kobrin, 1988]. One approach is for the parent company to use the same criteria for selecting HCNs as is used for expatriates. In addition, a corporate culture value assessment may be used to insure that candidates' personalities match the firm's values [Evans & Lorange, 1986]. In the PRC, most Taiwanese companies seem to be inclined to select new employees based on the recommendations of international employees. Indeed, about half of them promote local, highly-educated employees to be subsidiary managers [Huang, 1995; Kao, Lin Hsu & Lin, 1995]. Alternatively, it is still difficult to staff all new managers and financial experts using HCNs, especially chief executive officers (CEOs). Therefore, most Taiwanese companies import CEOs and top executives from their parent companies. . Training and Socialization In cybernetic systems, selection and training are considered to be input control activities [Snell, 1992]. Ouchi [1979] proposed that most organizations can rely on selection and screening only to a limited extent. Thereafter, they may rely on training to impart the desired skills and values. Indeed, training provides Dctennimmts of International and Intercultural HR Control 606l1.doc page 7 organization members with the necessary abilities and values to be successful in the organization. The component of training which ultimately has the greatest impact on control is values training or socialization [Etzioni, 1961]. This is an interpersonal process of informally or implicitly teaching organizational values and behavioral expectations to organizational members to bring them into line with what is required for successful participation within the organization [Jaeger and Baliga, 1985]. Therefore, MNCs that rely heavily on cultural control tend to emphasize a longitudinal process of socialization as the primary vehicle for managerial training. Its purpose is to ensure that future managers thoroughly internalize the corporate culture and related information-processing rules and norms before assuming managerial responsibilities in a subsidiary [Pucik and Katz, 1986]. In addition many MNCs recognized that management development programs need to emphasize worldwide information sharing on economic, social, political, technological and market trends. Some companies export home country training and development programs to other countries for local employees. In addition, they may bring host-country nationals to corporate headquarters in order to expose them to the corporate culture and help them develop a corporate perspective [Dowling and Schuler, 1990]. As indicated by Von Glinow & Teagarden [1988], the Chinese currently believe that training is the primary vehicle for creating productivity. Additionally, acquiring expertise through training accords a certain amount of power to the person who has been trained. A likely outcome of trainingis that the individual will be placed into a managerial position elsewhere, and they will be called upon to apply the training to their job. However, for the most part, the training is primarily technical training, and behavioral training is virtually nonexistent and exceedingly difficult to implement. By now, to minimize expatriation costs, most big Taiwanese companies have begun to devote even more resources to train their local managers in their PRC subsidiaries [Kao et aI., 1995]. Behavior Control In the MNC/Subsidiary context, bureaucratic control is manifested when headquarters manages the operations of subsidiaries primarily through a clearly defined set of rules and procedures. These rules may be enforced through budgets, on-site inspections, and/or control of management processes [Doz and Prahalad, 1984]. Detcnninants of Intematiooal and Intercuhural HR Cootrol 60611.doc p"ge 8 Bureaucratic control systems operate under principles of rationality and are characterized by a high degree of formalization. Standard operating procedures (SOPs) are the central elements of a bureaucratic control system. SOPs constitute behavioral repertoires which are expected of members in the organization and are written down in the form of company manuals or rule books [Hickson, 1966]. Child [1973] notes that bureaucratic control consists of the utilization of a limited and explicit set of codified rules and regulations which delineate desired performance in terms of outputs and lor behaviors. Based on assumption of a centralized hierarchy, behavior control is initiated at the top of the organization in the form of articulated operating procedures [Cheng and McKinley, 1984; Hitt, Hoskisson, and Ireland, \990]. Snell [1992] defined bureaucratic behavior control to come in the form of centralization, articulated procedures, close supervision, and behavior appraisal. In MNCs, bureaucratic control exists when headquarters controls the operations of a subsidiary primarily through a clearly defined set of rules and procedures. Doz [1986] notes that there are thirteen elements of subsidiary performance analyzed monthly by IBM corporate staff, and even more detailed analyses of results are conducted within each of these broad categories. In fact, centralization, formalization and standardization (such as written policies, rules, job descriptions, and standard procedures--through manuals and charts) are coordination mechanisms used by MNCs for integrating activities that remain dispersed across subsidiaries [Martinez and Jarillo, 1991]. In PRC, the Marxist Leninist doctrine has historically influenced performance, and except for meeting output quotas, workers have traditionally not been under pressure to perform [Von Glinow & Teagarden, 1988]. Given this, Kao et al. [1995] argued that tight and explicit monitoring will be useful for managing Chinese workers in the PRC subsidiaries ofTaiwan companies. Output Control The process of output control is basically a process of monitoring an indicator, comparing it with a standard, and then providing selective rewards and adjustment [Ouch, 1977]. In the case of output control, the transformation process need not be known, much less monitored, but a reliable and valid measure of the desired outputs must be available [Quchi, 1977; Hill & Hoskisson, 1987]. In addition, in order to induce performance that· fulfills an organization's intention, rewards systems need to be linked to results [Kerr, 1985; Snell, 1992]. Detenninanls of Intcmatirnal and Inten:ultural HR Cootrol 60611.doc page 9 In MNCs, it seems particularly important to match the corporation's strategic pursuits with the goals, competencies, and motivations of key mangers. [Edstrom and Lorange, 1984]. In fact, reward systems in most MNCs are based on a linkage between performance and financial incentives. Since the decoupling of appraisals and rewards may render control initiatives ineffective. [Pucik and Katz, 1988]. Furthermore, Pucik [1984] posits that reward systems must take into account equity issues within the organization and in the external labor market in these countries where managers are recruited. Therefore, output control in MNCs is based on the use of resultsdriven appraisals, performance reward links, and localized monetary incentives. In the PRC, financial incentives are beginning to influence work behavior [Von Glinow & Teagarden, 1988]. However, some argue that using bonus systems to promote greater work effort will fail because of the small magnitude of bonuses and preferences for the egalitarian distribution of bonuses [Jackson, 1992]. Nevertheless, as described by Huang [1995], floating variable wages almost explain 20% of base wages of Chinese workers in PRC subsidiaries ofTaiwan companies. THE DETERMINANTS OF IHR CONTROL Interorganizational Interdependence The influence of interorganizational interdependence on HRM has been advanced by two perspectives: resource dependence [Pfeffer & Cohen, 1984; Pfeffer & Langton, 1988] and institutionalism [Scott, 1987]. In the MNC context, various studies have noted a relationship between the dependence of the subsidiary on the multinational parent for resources and the influence of that parent over the subsidiary's HRM [Baliga and Jaeger, 1984; Martinez and Ricks, 1989]. However, as indicated by Prahalad and Doz [1981], after subsidiaries mature and grow, they may have adequate technology, management capability, and marketing capabilities such that the HQ cannot continue to rely on control over these resource as a means of influencing subsidiary strategy. When this is the case, the subsidiary's dependence on local resources may become more profound. Additionally, institutional theorists have argued that the relational networks in the environment play an important role in influencing the behavior of organizations [Meyer & Scott, 1983; Zucker, 1988]. When a subsidiary is embedded in an external network (consisting of the parent organization, such as partners, suppliers, regulators, and competitors), its HRM will be influenced by these host institutions [Wright and McMahan, 1992]. Therefore, it is imperative to < ". D~einimantsof IntematiooaI3IId Intercultural HR Cootrol 60611.doc page 10 investigate the effects of the subsidiary's interdependencies with parent and local institutions on choice of its HRM controls. Parent Resource Interdependence According to a study by Kao et al [1995], 52.3% of raw material for PRC subsidiaries and 73.4% of all production equipment for PRC subsidiaries comes from their Taiwanese parent companies. In addition, 80% of Taiwan parent companies executed new product designs and innovations and market. All to say, PRC subsidiaries have high degree of interdependence with their Taiwan parents. In fact, MNCs relied on control over resources. such as capital, technology, and management as a means of influencing subsidiary strategy. According to the resource dependence model [Pfeffer & Salancik, 1978], ifa subsidiary depends on a flow of valuable resources (e.g. money, technology, information, skills) from intercountry organizations (e.g. HQ, and subunits of MNCs), its human resource practices will be influenced by them greatly [Pfeffer & Cohen. 1984; Pfeffer & Langton, 1988]. As indicated by Martinez and Ricks' empirical study [1989], the influence of a multinational parent over the HRM decisions of an subsidiary is positively related to the extent to which a multinational parent provides resources to that subsidiary. In this situation, the hierarchical power of HQ is more effective at counteracting the power of the subsidiary, and it is potentially easier to have direct control over such a relationship through this mechanism. Similarly, as proposed by Prahalad and Doz [1981], in a pure hierarchical organization, the support system (such as personnel) tends to be aligned with the hierarchy. Martinez & Ricks [1989] found that U.S. parent companies tended to be more involved in the selection process of managers for subsidiaries with high resource dependence on the parent company. Alternatively, subsidiaries with low resource dependence would simply submit a selection decision to the U.S. parent for approval after the decision had been made by the subsidiary's general manager. Therefore. the subsidiary's dependence on I . parent's resources influences the level of input control exercised by the parent. Additionally, when a subsidiary has high level of dependence on its parent's technology or management srstem, it is expected that formal training programs or inpatriate visits will be necessary for the subsidiary's managers or related personnel to become proficient [Pucik & Katz, 1986]. Thus, subsidiary's dependencies on parent's resources are usually positively related to the level of training & socialization offered. Deteimin:mts of Intematienal 3I1d Intercultural HR Centrol 6061 I.doc page 11 Furthermore, as indicated by Martinez & Jarillo [1991], a subsidiary's' dependence on parent's technology or tight integration in the purchasing function will lead to high levels of global integration in the business strategy. Therefore, more formalization, standardization and centralization will be used as global coordination mechanisms. Edstrom and Lorange [1984] also indicated that in a global business, conglomerates are characterized by operational interdependencies evident in product sourcing and standardization of marketing. Hence, a manager's freedom to act will typically be more restricted. Pucik & Katz [1986] proposed that the explicitness of rules and bureaucratic control systems are related to how much technology and information is transferred to the subsidiary. Consequently, subsidiary's dependence on parent's resources will be positively related to IHRM control. Hypothesis Ja: Interdependence with parent's resources is positively related to IHR input control. Hypothesis Jb: Interdependence on parent's resources is positively related to IHR behavior control. Locollnstitution Interdependence Since 1992, the PRC has gradually opened its local markets to MNCs. Since then, most big Taiwanese companies began to cultivate their relationships with local suppliers, distribution channels, and host governments in order to penetrate the market in China [Kao et al., 1995]. As the subsidiary matures and becomes bigger, it can expand its base of technical, manufacturing, financial, and management resources. Likewise, if a subsidiary interacts with customers, suppliers, regulators, and competitors within this country, or if it is partly owned by local firms, it will have a high level of local institution dependence. When this is the case, its success may depend more on how well it fits in its local environment than on how much support it needs from HQ [Doz & Prahalad, 1986]. Additionally, according to institutionalism [Scott, 1987], the HRM practices of a subsidiary will also be influenced by host governments enacting certain laws (such as Equal Employment Opportunity regulations and Minimum Wage statutes). Similarly, practices may be influenced by other organizations (such as local competitors) [Wright & McMahan, 1992]. In other words, host institutions dependencies will influence subsidiaries' HR practices. For instance, these pressures may necessitate that performance appraisals be directly linked to reward structures. Indeed, Hambrick & Snow [1989] propose that if the managers are considered to be independent contnbutors, their rewards should be directly linked to the performance of their units. Consequently, Hypothesis 2: Dependence on local institutions is positively related to IHR output control. Determinants of Intcmatiooal and lntcrcuhural HR Cootrol 60611.doc page 12 Competitive Strategy Schuler & Jackson [1987] are among a growing number of researchers who have made a link between HRM practices and competitive strategies. To do so, they adapted Porter's [1985] competitive strategies by focusing on innovative, quality enhancing, and cost reducing HR strategies. Their research revealed that two factors, low cost competition and local differentiation, are particularly important to a company's HRM control. In addition, as proposed by Bartlett & Ghoshal [1987] and Prahalad & Doz [1987], global competitive strategies need to capture the cost advantages of global integration of certain activities vis-a-vis the benefits that could be derived from responding to national differences in tastes, industry structures, distribution systems and government regulations. Therefore, we tum to the relationship between these two strategic imperative and human resource control in the cross-cultural or cross-national context. Low Cost Competition When a l'v1NC enters into the mature phase of the product life cycle, cost competition will become the major business strategy of its subsidiaries. In such a state, the focus is on productivity and cost effectiveness [Alder & Ghadar, 1989]. Usually, this is a globally integrated firm which develops an integrated approach and enforces similarity to pursue economies of scale [Adler & Ghadr, 1989]. In this situation, the parent company will emphasize selecting subsidiary managers who understand and appreciate global strategies (Edstrom & Lorange, 1984]. Additionally, ifa company has an efficiency orientation, it will stress the long-term development of employee abilities, skills and knowledge [Bird & BeecWer, 1995]. In addition, to reduce costs, MNCs will reduce their expatriate populations and stress training on local managers [Kobrin, 1988].Therefore, cost competition will lead to more IHR input control. Furthermore, Gomez-Mejia, Balkin, & Cardy [1995] proposed that explicit job descriptions and the use of performance appraisal as a control both fit Porter's overall cost leadership strategies. In addition, Bird and BeecWer [1995] also propose robust relationships between an efficiency orientation and centralized control systems and standardized operating procedures. Therefore, it appears that a low cost strategy will lead to more IHR control. Hypothesis 3a: Cost competition is positively related to IHR input control. Hypothesis 3b: Cost competition is positively related to IHR behavioral control. DetermmanL~ of lnternatimal and lntercuhural HR Centrol 6061 I.doc page 13 Local Differentiation If the needs of host country's market differ considerably from those others in which the MNC operates, the resident subsidiary must differentiate its products to respond to local customers [Bartlett & Ghoshal, 1987]. Sometimes, MNCs use a cultural diversity dimension to differentiate products and services when culturally distinct markets must be served. In addition, they may tap cultural diversity differences.. as a source of new ideas when innovation is needed [Alder and Ghadar, 1989]. In this situation, the company should use perquisites and benefits to attract high skilled labor, scientists, and creative people while using performance appraisals as developmental tools [Gomez-Mejia et al., 1995]. Furthermore, as proposed by Edstrom & Lorange [1984] , in this situation the parent needs to stress that the national manager's reward will be linked to financial and market performance measures. Consequently, Hypothesis 4: Local differentiation is positively related to /HR output control. Cultural Difference Cultural difference refers to the extent that a subsidiary's national culture differs from its corporate culture [Boyacigiller, 1990]. Key dimensions of culture include such characteristics as: individualism versus collectivism, large or small power distance, strong or weak universality avoidance, and masculinity versus femininity [Hofstede, 1983]. Laurent's [1986] research demonstrates that there is variance across continents (the U. S. vs. Europe), and countries (within Europe) along these dimensions. Naturally, the HR policies developed at headquarters usually reflect the national cultural of the MNC [Schneider, 1988]. According to Schuler & Jackson [1987], MNCs can choose from a menu ofHR practices, but there remains a need to keep the MNC's and the subsidiary's strategies and cultures somewhat aligned by taking into account the differences in national cultures where the subsidiaries are operating. Based on the existing literature [Von Glinow & Teagarden, 1988; Jackson, 1992; Huang, 1995; Kao et al, 1995], the cultural differences in organizations in the PRC and Taiwan can be categorized as follows, Taiwan (a) emphasis on cooperation and teamwork, (b) organization takes care of employees' interests, (c) emphasis on decentralization, ~d) employees help each other, (e) organization actively manages problems; PRC: (a) emphasis on individual needs, (b) employees look out for their own interests, (c) emphasis on centralization, (d) subordinates depend on their leader, (e) organization passively addresses problems. DetcnhinantsofIntemational and Intercultural HR Control 6061 1.doc page 14 Generally speaking, high cultural differences will put a subsidiary in danger of being overpowered by local cultural and economic forces. When this threat exists, MNCs are more apt to use tight control over the subsidiaries [Cray, 1984]. Thus, cultural differences will be positively related to lHR behavior control. Hypothesis 5a Cultural differences Is positively related to IHR behavior control. Hypothesis 5b: . The interaction ofcultural difference and interdependence with parent resource is positively related to IHR behavior control. Hypothesis 5c: The interaction ofcultural difference and low cost strategy is negatively related to IHR input control. For instance, consider the case of subsidiary with a high cultural difference and a high interdependence on its parent. The parent wilI need to send expatriates to transfer technology and management to the subsidiary. However, the local employees might be reluctant to accept the parent's culture given the large culture difference. In this case, the subsidiaries tend to be easily influenced by local cultural or economic forces. Alternatively, when there are low cultural differences, the expatriates who are sent to transfer the parent's technology and management systems wilI find it easy to transfer their technology and management to local employees. Thus, behavior control over the subsidiary will be low. As suggested by Baliga & Jaeger [1984], in the case of a subsidiary with a high sequential interdependence (receiving resources from other parts of the MNC) and high cultural proximity, the parent should not adopt behavior control over the subsidiary. Consequently, the interaction of interdependence with parent and cultural difference is positively related to the behavior control over subsidiaries. Next, consider the case of a subsidiary with low cost strategy and high cultural differences. Cultural differences raise costs and complicate of socialization [Baliga & Jaeger, 1984]. Thus, the parent will probably not rely on selection control over the subsidiary's HR inputs for the reason of low cost consideration. Alternatively, in the case of low cultural differences, training & socialization which can impart the parent's values and technology to the subsidiary will become an important alternative to control the subsidiary's HR inputs [Wilkins & Ouchi, 1983]. This is even more likely to be true when the subsidiary is not able to afford a better base of technical and managerial cap~ilities to pursue a low cost strategy. Consequently, the interaction of low cost strategy and cultural difference is negatively related to the use of IHR input control over subsidiary. Dd~3Ilts of International 3Ild Intcrcuhural HR Control 60611.doc page 15 MEASURES AND METHODS Sample Three hundred fifty six Taiwanese subsidiaries in the PRC were surveyed during June to September of 1995. The companies that were selected comprise half the 712 Taiwanese subsidiaries which were all listed in the register compiled by the Association of Taiwanese companies in PRC. Questionnaires were sent to and completed by the CEO or HR executive of the parent company. One hundred respondents returned questionnaires, for a response rate of 28%. Summary statistics (see Table I) suggest that these firms present a reasonably representative sample of the Taiwanese subsidiaries operating in the PRC. In instances, the percentage of ownership by the parent company was at least 50%. Seventy three subsidiaries are the in manufacturing industry and twenty seven are service related. Measures IHR Control The HR control items were designed to measure the degree of selection control, training control, behavior control, and output control used by the parents. They are outlined below: 1. INPUT: Selection control: parent's approval of subsidiaries' managers above second-level, parent's agreement with staffing of subsidiaries' managers, and parent's procedures for staffing subsidiaries' mangers. 2. INPUT: Training and Socialization control: managers and technicians frequently visit the foreign group, parents commitment to training managers, parents involved in managers' skill development, substantial foreign training for subsidiaries' managers before assignment. 3. THROUGHPUT: behavior control: explicit monitoring, frequent feedback, and centralization of appraisal. 4. OUTPUT: Rewards control: results criteria, performance-reward link, localized monetary incentives. The measures of control were based upon research by Snell [1992]. They were modified somewhat for this MNC, as opposed to a solely domestic context. The scale for control consisted of 24 indicators on a 7-point Likert scale. lnterorganizationallnterdependence Two measures of interorganizational interdependence were used: interdependence with parent and dependence on local institutions. First, parent resource interdependence was measured with a 5-item, 7-point da~3Ilts of Intematienal and Intercuhural HR Centrol 6061 I.doc page 16 Likert Scale adapted from the work of Martinez and Ricks [1989] and Prahalad and Doz [1981]. It consisted of questions addressing: the degree to which parent's technology is used, management know-how, the degree of integration of subsidiary's purchasing with the rest of the corporation, the ratio of the subsidiary's exports to total sales, and the ratio of the subsidiary's sales to its parent's total sales. Local institution interdependence was measured with a 7-item, 7-point Likert scale adapted from Ghoshal and Bartlett [1990]. It included: reliance on local technological expertise, reliance on local managerial expertise, strength of relationships with local suppliers, reliance on the host government, reliance on host country distribution channels, and reliance on management know-how provided by local competitors and partners. Competitive Strategy Two dimensions of competitive strategy were analyzed to assess the competitive advantages of the subsidiary: low cost competition and local differentiation cost. The first, low cost competition was measured with a 4-item Likert Scale adapted from Schuler and Jackson [1989]. It measured the importance ascribed to: maximizing operating efficiency, maintaining high product quality, stable procurement of raw materials, and improving operating processes. Local differentiation was measured with a 4 item, 7-point Likert Scale adapted from Schuler and Jackson [1989] and Kim and Mauborgne [1992]. It tapped the degree to which the subsidiary: modifies product offerings to meet local customer needs, adapts promotion schemes to the local markets, innovates new product (or service) to address local demands, and adapts its distribution approach to the local market. Cultural Difference To assess the cultural differences between host country and parent company a 5-item, 7-point scale adapted from the cultural dimensions of Hofstede [1983] was used. (shown in Table 2). The respondents were asked the following questions about each item of the five items: What is the level in the parent company? What is the level in the local environment? The two responses were then compared and the difference between the two was defined as a cultural difference. Methodology The first step in this analysis was to identify the dimensions ofIHR control, competitive strategy, and interorganizational interdependence. Since it can be used for construct validation, detecting tentative dimensions, l:3~~:mts of Intematienal :md Intercuhural HR Centrol 6061 1.doc page 17 and identifYing items for deletion [Schwab, 1980], factor analysis was used in this step. It was used to group together and then reduce the number of items for each of these constructs so that the underlying dimensions could be identified. The specific method applied was factor analysis of principle components with varimax rotation. This enabled us to assess the convergence within and divergence between the scales. The second step consisted of examining the relationships between the different dimensions of IHR control that emerged and each of their contextual determinants. This facilitates the testing of the hypotheses formulated previously. One set of hypotheses (1,2,3,4, and 5a) address the main effects that the interdependency, strategy, and cultural difference variables have on IHR control. Another set (5b and 5c) focuses on the effects of several interactions on IHR control. Thus, a hierarchical model in which these variables and the interaction terms were entered according to their predicted causal sequence [Stone and Hollenbeck., 1984; Baron and Kenny, 1986] was used. The effects of our hypothesized predictors were assessed on the basis of their individual unstandardized regression coefficients [Duncan, 1975; Aiken and West, 1991] and their contribution to the total variance in IHR control, evaluated as a change in R • The interaction terms were entered into the equation after all the related study variables had been controlled for [Cohen & Cohen, 1983]. Dctcimiil:mts of Intematiooal :md IntL'fcuhural HR Cootrol 6061 I.doc page 18 RESULTS Intercorrelations Table 2 give means, standard deviations, and coefficient alphas, for the variables. The alphas indicate internal consistency [James, Demaree, and Wolf, 1984]. As can be seen, the alphas for all the IHR control variables, cultural differences and competitive strategy measures were higher than. 70. This is a level which is satisfactory for basic research; for the proportion of error variance for a scale with an alpha of .80 is precisely the same for any test regardless of the number of items [Cortina, 1993]. Note that all of the alphas also meet Nunnally's [1967] criterion of .50 for adequate reliability. Factor Analyses IHR Control The first factor analysis of IHR control produced three stable factors representing input, behavior, output control. Each had an eigenvalue above 1.0, and in sum they accounted for 82 percent of variance in the data. Table 3 gives items and factors loadings. InterorganizationalInterdependence The second factor analysis for interorganizational interdependence produced two stable factors representing subsidiaries' dependence on local institutions and interdependence with parent. Each had an eigenvalue above 1.0, and together they accounted for 41 percent of variance in the data. Table 4 gives these items and their factor loadings. Competitive Strategy The third factor analysis of competitive strategy produced two stable factors representing local differentiation and low cost competition. Each had an eigen value above 1.0, and in total they accounted for 70 percent of variance in data. Table 5 gives the items and factors loadings. Moderated Multiple Regression Analyses Predicting IHR Input Control In the first hierarchical model (Table 6), we test the hypotheses addressing the main and moderated effects of the contextual determinants on IHR input control. In Equation 1, we begin by regressing input control on interorganization interdependence. In Equation 2, cultural difference and the interaction terms generated by Dliterriiin3llls of Intemational and Intercultural HR Cootrol 6061 1.doc page 19 cultural difference and interorganization interdependence are introduced. These equations make it possible to examine the main effects of interorganizational interdependence and cultural differences on input control, and their interactions. In Equation 3, the competitive strategy variables are introduced to examine their main effects on input control. Next, cultural difference and the interaction terms generated by competitive strategies and cultural difference are included in Equation 4. Finally, the complete model incorporating interorganizational interdependencies, competitive strategies, cultural differences and their interactions is represented in Equation 5. With respect to the predictors of IHR input control, in Table 6, we found that the main effect of a low cost competition strategy .94 is present (b=O.3, p<.05). In addition, the interaction effect generated by cultural difference and the low cost competition strategy is significant negative (b=-O.04, p<.05). These findings suggest that low cost competition is positively related to the selection control over subsidiary. MNCs need to select and train subsidiary's managers who understand and appreciate the global strategy for pursuing economies of scale in an integrated and global organization [Edstrom & Lorange, 1984]. However, when cultural difference is high, the positive effect of low cost competition on input control will be reduced, because decentralizing responsibility is a means of minimizing payroll costs to foster for executing low cost competition. Moreover, cultural differences generate higher costs for training & socialization. It is worthy to note that an initial finding of a main effect of dependence on local institution interdependence on input control (b=O.20, p<.05) seems to contradict the findings of Martinez & Ricks [1989] and the argument of Prahalad & Doz [1981]. They argue that dependence on local resources causes the subsidiary to be more independent, and, thus, the parent will not be able to influence selection decisions. This observation can be countered as follows: many Taiwanese companies entered into the PRC only within the last six years (see Table 1). Also, due to the restrictions of the PRC's government, many Taiwanese companies have adopted joint venture arrangements with local partners. In addition, as a result of the political tensions between the PRC and Taiwan, Taiwanese companies are more dependent on local institutions. In this situation, dependence on local institutions is not exactly the same as a situation where a subsidiary becomes more independent after a long history, as alluded to by Prahalad & Doz [1981]. In this situation, HR input control can import the parent's management of the subsidiary and become an important control. mechanism at the beginning of the foreign investment, lest the subsidiary should be swayed by local forces and deviate from the parent's goal [Cray, 1984]. Dctenninants of Intcmatiooal and Intercultural HR Cootrol 60611.doc page 20 Predicting IHR Behal'ior Control In the second hierarchical model (see Table 7), we test the hypotheses concerning the main and moderated effects of these contextual determinants on IHR behavior control. In Equation I, we begin by regressing behavior control on interorganizational interdependencies. In Equation 2, cultural difference is introduced and the interaction terms generated by the interdependence variables and cultural difference are added. These equations make it possible to explore the main and interaction effects of interorganizational interdependencies and cultural differences on bureaucratic behavior control (Hypotheses Ib and 5a). In Equation 3, we isolate the effects of the competitive strategy variables. In Equation 4, cultural difference and the two interaction terms generated by competitive strategies and cultural differences are included. These equations enable us to test the main and interaction effects of competitive strategies on behavior control. In Equation 5, the main and interaction effects for interorganizational interdependencies, competitive strategies, and cultural differences are represented. Concerning the determinants of behavior control, we find that initially there are significant positive relationships between the behavior control and parent resource interdependence (b=O.35 , p<.05) in Equation I and a positive interaction effect between cultural difference and parent resource interdependence (b=O.05, p<.05) in Equation 2. In Equation 4, a positive effect for low cost strategy (b=O.79, p<.OI) is observed. These results suggest that when a subsidiary is highly dependent on parent's resources, the MNC usually will exert behavior control over the subsidiary. As proposed Martinez & Richks [1989], if a MNC has a greater strategic control over the resources in its subsidiary, its hierarchical power will facilitate a tighter control over the subsidiary's performance. When a subsidiary is seen to be in danger of being influenced by local cultural forces, a MNC is more apt to introduce formalized mechanisms to gain control. Furthermore, Equations 3 and 5 confirm that a low cost strategy is also associated with increased behavioral control (b=1.52, p<.05). Predicting IHR Output Control In the third hierarchical model (see Table 8), we test the hypotheses relating to the determinants of IHR output control. In Equation I, we begin by regressing output control on the interorganizational interdependence variables. In Equation 2, we bring in cultural differences and several interaction terms. In Equation 3, we introduce the competitive strategy variables. Equation 4 includes the competitive strategy and cultural difference interaction terms as well. In Equation 5, the complete set of main and interaction effects are modeled. Drtcnninants of Intematimal and Intercultural HR Control 60611.doc page 21 As for the determinants of output control over subsidiaries, these results reveal that local institution interdependence, parent resource interdependence, and local differentiation strategy are invariant with IHR output control. Thus, Hypothesis 2 and 4 are not supported. They propose that when a subsidiary is highly dependent on local resources or adopts a local differentiation strategy, it will increase its output control over the subsidiary by linking rewards to performance. As indicated by Von Glinow & Teagarden [1988], due to the cultural and ideological factors, financial incentives are quite new and they are only beginning to be used to influence Chinese work behavior. Generally, when a unit within an enterprise performs meritoriously and a cash incentive is distributed, that incentive is distributed equally among all individuals, no matter where the work group, department, or division is in the hierarchy. Jackson [1992] also indicated that the failure of the Chinese bonus system to promote greater work effort in the workplace can be explained from two perspectives: (a) the magnitude of the bonuses and (b) the egalitarian distribution of bonuses. Therefore, at present, financial incentives do not seem to work well in the PRC. These conditions may contribute to the non-significant relationships between dependence constructs and output control. Additionally, in the PRC, rapid change and innovation are almost universally resented and resisted [Von Glinow & Teagarden, 1988]. Thus, the motivation of financial incentives to encourage innovative worker behavior may not be effective. Furthermore, most Taiwanese companies in the PRC execute a local differentiation strategy usually by modifying their existing products from Taiwan, because of the developing stage of the PRC economy [ Kao et al., 1995]. This situation may also contribute to the non-significant relationship between local differentiation and output control. Alternatively, in Equations 3, 4, and 5 in Table 10, we found a positive relationship between low cost strategy and output control. Therefore, output control may be mostly useful for encouraging Chinese workers to promote their operational efficiency. In summary, the conclusions that may be derived from this study are that a low cost strategy has a strong, positive effect on IHR input control. This effect is even stronger when the cultural difference between the parent and subsidiary is low. In addition, a low cost strategy also has a significant, positive effect on IHR behavior control and IHR output control. Furthermore, cultural difference has a significant, positive effect on IHR output control. DdLnrun3l1ts of Intcmatiooal and Intercultural HR Cootrol 60611.doc page 22 As proposed by Ghoshal and Bartlett [1990], MNCs are interorganizational networks. They are embedded in external networks made up of other organizations including: owners, regulators, customers, suppliers, and other entities. The MNC's headquarters as well as its subsidiaries must interact with these groups. In any interorganizational network, a subsidiary's HR is liable to be influenced by these interorganizational interdependencies, which include: parent resource interdependence and local institution interdependence. Indeed, Baliga and Jaeger [1984] have proposed that these interdependencies are the most crucial factors influencing the HR policies and practices of any subsidiary. However, these relationships are thought to be moderated by cultural proximity. As for the relationship between IHR and business strategy [Bird & Beechler, 1995], it is important to consider the influence of the subsidiary's host culture and the parent's organizational culture [Schneider, 1988]. Excellent MNCs work to align their organizational culture, overall strategy, and human resource management practices [Adler & Ghadar, 1989]. In this study, the IHR control mechanisms ofTaiwanese subsidiaries in the PRC are observed to be affected by interorganizational interdependencies, competitive strategies, and cultural differences. Future Research Although the field of strategic control of IHR has advanced over the last decade, most of the development has been conceptual, often focusing on the effects of cultural factors or product life cycles on different competitive strategies and interorganizational interdependencies. As revealed in this study, these factors exert both main and interaction effects on IHR control. Therefore, the findings from this study should be useful to international human resource managers and researchers interested in strategic international human resource management. The current study has several limitations which need to be discussed and improved upon in future research. First, as noted, the respondents in this study were CEOs and HR executives in Taiwan. Officers or HR executives in the subsidiaries in the PRC were not surveyed. Future research might incorporate inputs from the subsidiary-level counterparts of the parent company executives we surveyed. Also, future research might try to refine the constructs and operationalizations of interorganizational interdependence, competitive strategy, and cultural differentiation. For example, in this study, items regarding subsidiaries' expatriates, an important factor related to a subsidiary's dependence on its parent's resource were not included. Martinez and Ricks [1989] point btiCffiunants of InlemaliooaI and InlL"fcullural HR Cootrol 60611.doc page 23 out that expatriate managers have a substantial influence on affiliates' HRM decisions. Therefore, future studies that include inputs from this group may be even more informative. Third, future research might try to refine the constructs and operational definition of human resource control. For instance, in this study, items related to local acculturation of subsidiaries' expatriates an important element of a subsidiary's HRM -_were.not included. In addition, as is shown in Table 1, all ofthe Taiwanese subsidiaries have been in the PRC for less than six years. This time limitation is likely to have affected dependence on local institutions. Hence, the subsidiary independence status proposed by Prahalad & Doz [1981] may not yet be possible. Finally, the construct domain for output control remains somewhat unclear. Further research might investigate whether explicit performance reporting systems are best conceived as a form of output control, as Jaeger and Baliga (1985) suggest, or whether they are associated with behavior control (Snell 1992). As stated by Snell (1992), researchers have developed many different frameworks to describe both of these types of control. This study stresses the control over process to be a form of behavior control, thus the subsidiary's frequent reports to headquarters are construed to be a method for MNCs to control the subsidiary's HR. processes. Obviously, further research is need to refine this construct. Despite these limitations, the results from this study provide us with a better understanding of the relationships between subsidiaries' IHR. strategies and the IHR. controls used to implement them within multinational corporations. Deteffi;in3l1ls of International 3l1d Intercultural HR Control 60611.doc page 24 Table 1 Subsidiary Sample Profiie Characteristic Categories Firms (n=100) Location of Subsidiaries